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Market Watch

RSS By: Alan Brugler,

Alan Brugler is the President of Brugler Marketing & Management, and the primary analyst and advisor.

Demise of the Index Fund Rally

Oct 03, 2008
If you had any doubts about what was really driving futures trading last week, just look at the table. Everything was down, not just two or three commodities with bearish fundamental developments. This broad based decline is symptomatic of macro or outside market factors. One would be the US dollar, which was sharply higher for the week. Commodities priced in dollars go down in price if the value of the dollar goes up, all else being equal. The second factor is related. Index funds with their buy and hold mentality were a big piece of the 2006-2008 commodities rally. One of their reasons for buying was a bet on a weak dollar and on rising inflation. Both premises were looking flimsy, and those investors were also having trouble borrowing money to meet margins calls, because of the credit crunch. The bottom line is that they are liquidating positions.
Since each index fund contains between 6 and 36 commodities, liquidation results in broad based selling of the kind we saw this week. The Commitment of Traders report on Friday night only carried data through Tuesday, but it showed the index funds liquidating 11,042 long contracts in corn during 5 market days from the previous report. That’s 55 million bushels of selling. Net index fund selling was also seen in wheat, soybeans, cattle, hogs and cotton.
Below is a table showing the net weekly change of selected agricultural futures products:
Market Watch
% Change
Dec Corn
Dec CHI Wht
Dec KC Wht
Dec MGE Wht
Nov Soybeans
Oct Soy Meal
Oct Soy Oil
Oct Lv Cattle
Oct Fdr Cattle
Oct Ln Hogs
Oct Cotton
Dec Oats
Nov Rice
Corn futures plunged 90 cents for the week. As mentioned above, index funds were cutting their net long position. The large reportable speculators were also both cutting longs and adding fresh short positions. This selling pressure was mostly due to financial pressures, but reinforced by a slow down in corn export sales and another week of minimal frost damage that allowed more of the late planted crop to go to full maturity.
Soybean futures were down 15% for the week, a whopping $1.75 per bushel. Product values were a big problem. Soybean meal competes with both corn and DDGs, and prices of both were down hard. Basis got sloppy. Soy oil saw good news in terms of increased biodiesel consumption and lower Census stocks. However, bean oil’s value as a fuel dropped with the value of diesel. Field reports continue to reinforce USDA’s projection for below trendline national average yield, but the final ending stocks of 205 million bushels for last year (Tuesday’s Grain Stocks report) was like finding another 70 million bushels of production already in the bin.
Wheat was down 10 to 11% at all three exchanges. In addition to the broad index fund type selling, Stats Canada threw in a bearish variable with a larger than expected Canadian wheat production number on Thursday morning. Weekly export sales for the US were on the high side of expectations, but cumulative sales for the year to date still lag year ago in all wheat classes.
Cotton prices were down a more modest 4.45%. For a couple days the market was too oversold to follow grains lower, but in the end the liquidation selling by the old bulls and the poor weekly export sales were too much to result in a gain for the week. Heavy deliveries against October futures also weighed on the market.
Cattle futures finally gave up the bullish fight, breaking weekly chart trendline support to get the technicians bearish and losing cutout value to draw in the fundamental sellers. Wholesale beef prices are being hurt by sagging consumer/export demand that isn’t yet being improved by cheaper gasoline prices. Ready numbers are still low on a year/year basis until we get into November, but without the demand side it is tough to be bullish on supply alone. The drop in corn prices also screwed up those who had been assuming forced herd liquidation would result in tighter cattle numbers for 2009.
Hogs were down 4.6% for the week. Futures are well below cash prices, suggesting that it is the Board that has the problem. That problem is longs who no longer want to be there. The Hogs & Pigs report confirmed record or near record weekly slaughter is likely into at least Thanksgiving. Export demand is thought to be slowing with the rapid rise in the value of the dollar. More pork and less exports means US consumers have to eat more. They only do that if you put the stuff on sale! Packers weren’t inclined to pay up for hogs until they had evidence that the product was moving, and wouldn’t in any case if they saw bigger numbers coming to market.
Market Watch: Cattle futures will begin the week working off positions acquired as a result of Friday’s options expiration in the October contract. USDA will give us the regular Monday reports on Export Inspections and Crop Progress. Maturity is expected to move up sharply due to warmer and drier weather for corn and beans this past week. Thursday is the last trading day for October cotton. The main USDA reports for the week will be released on Friday morning, when both Crop Production and WASDE Supply/Demand will be issued. Some of the changes are known, such as the need for USDA to cut last year’s corn use and the increase in 2007 soybean production which was announced on the 30th but needs to be incorporated into the balance sheet. The wild cards will be the crop production estimates, since USDA is also likely to adopt FSA acreage numbers in this report, instead of using the survey based numbers from the prior two reports. Yield forecasts could also be adjusted.
There is a substantial risk of loss in futures & options trading. Past performance is not necessarily indicative of future results.                         
Copyright 2008 Brugler Marketing & Management LLC. Reproduction or rebroadcast of any portion of this article without written consent of Brugler Marketing & Management LLC is strictly prohibited.
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